Is Trump Really a Good Bet for E&P Players?
Donald Trump is racing ahead in the 2016 GOP presidential nomination. Questions arise whether is it good or bad for the beleaguered oil exploration and production (E&P) space.
Crude Carnage Continues
A prolonged spell of low commodity prices has bashed E&P companies, especially the ones with a weak balance sheet. With crude becoming too cheap to drill profitably, a number of debt-laden entities have run into cash flow problems. Apart from the now routine job layoffs, most of these companies have resorted to asset sales and capital spending cuts in an effort to re-organize operations and lighten the debt burden.
This is aptly reflected in the recent downgrade of 25 energy companies by Moody's Investors Service, the rating services arm of Moody's Corp. MCO. Of these, E&P companies accounted for 17 downgrades. Per the agency, continued oversupply coupled with weaker-than-expected demand continues to push prices down.
The latest reports from Ensco plc ESV and Baker Hughes Inc. BHI – with updates on idled rigs, shrinking dayrates and lack of new contracts – bear further evidence that the country’s drillers are still smarting under a bleak outlook. As a result, West Texas Intermediate (WTI) crude futures are currently hovering around the $34-per-barrel mark. Moreover, domestic stockpiles that topped 518 million barrels aren’t helping one bit. In fact, supplies at the Cushing, OK storage hub have jumped to an all-time high.
Wall Street: Thumbs Down
A plethora of stocks in the E&P space have dived sharply year to date. Of these, Ensco is down almost 29.0%, shares of Ocean Rig UDW Inc. ORIG is down 47.2%, Seadrill Ltd. SDRL has seen a 20.4% plunge and Transocean Ltd. RIG is down 12.5%.
With the E&P players slipping on low oil price, most industry components are trading at or close to their 52-week lows. What’s more, according to some analysts, the worst is still to come for the drillers.
Ray of Hope
However, the end of the tunnel for the E&P space seems to be drawing to a close. According to a report by UBS AG UBS, oil is slated to recover to $55 per barrel from the current $34 per level in a year. However, the report is also apprehensive of a spike in international oil supply, which the agency feels would only delay the recovery.
Trump Card for E&P?
In such a scenario, popular media fancies Donald Trump as a boon to the hassled E&P space. After all, Trump is a strong advocate of offshore drilling and fracking as well as TransCanada Corp.’s TRP Keystone XL project.
On the other hand, given the high level of domestic stockpiles, a pragmatic solution is to keep new production in check over the near term. Here, however, we are worried about Trump’s drive to expand offshore drilling to step-up the persistently dwindling active rigs. We feel any stimulus toward new production would only hold back the much-needed recovery in the beleaguered oil.
Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free report >>
Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free report
MOODYS CORP (MCO): Free Stock Analysis Report
UBS GROUP AG (UBS): Free Stock Analysis Report
BAKER-HUGHES (BHI): Free Stock Analysis Report
ENSCO PLC (ESV): Free Stock Analysis Report
TRANSOCEAN LTD (RIG): Free Stock Analysis Report
SEADRILL LTD (SDRL): Free Stock Analysis Report
TRANSCDA CORP (TRP): Free Stock Analysis Report
OCEAN RIG UDW (ORIG): Free Stock Analysis Report
To read this article on Zacks.com click here.
Zacks Investment Research
